6 Some empirical facts Implications of different growth rates Lecture 2/5 What if? If US growth 1% lower since 1870 then current output per capita would equal Mexico s. Intermediate Macroeconomics if US had grown as fast as Japan over this period US output 3.3 times higher. If Ethiopia grows as fast as US since 1870 reach current US standards in 239 years If Ethiopia grows as fast as Japan since 1870 reach US standards in 152 years Relatively small changes have enormous long run impact. Günter W. Beck Advanced Macroeconomics November 23, / 34

7 Some empirical facts Stylized facts of economic growth In the short run, important fluctuations: Output, employment, investment, and consumption vary a lot across booms and recessions. In the long run, balanced growth: Output per worker and capital per worker (Y /L and K /L) grow at roughly constant, and certainly not vanishing, rates. The capital-to-output ratio (K /Y ) is nearly constant. The return to capital (r) is roughly constant, whereas the wage rate (w) grows at the same rates as output. The income shares of labor and capital (wl/y and rk /Y ) stay roughly constant. Substantial cross-country differences in both income levels and growth rates. Günter W. Beck Advanced Macroeconomics November 23, / 34

23 Dynamics of the model The balanced growth path Balanced growth path (steady state): A situation where each variable is growing at a constant rate. In equilibrium L grows at rate n A grows at rate g K grows at rate n + g Y grows at rate n + g K L grows at rate g Y L grows at rate g A nice way to show some of the results above is to take logs and differentiate with respect to time t. Note that in general we can compute growth rates as follows ln x t = 1 x ẋ t = ẋt x t = g x. Günter W. Beck Advanced Macroeconomics November 23, / 34

24 Dynamics of the model The impact of a change in the saving rate y, δk, i * y NEW The Impact on Output s NEW f(k) (n+g+δ)k * y OLD s OLD f(k) 0 * k OLD * k NEW Figure 1.4 The effects of an increase in the saving rate on investment k Günter W. Beck Advanced Macroeconomics November 23, / 34

25 Dynamics of the model The impact of s on consumption 1 An increase in the saving rate has the following two effects on consumption (Remember: Steady-state consumption is given by c = (1 s)f (k ), where an denotes steady-state values.): Initially, the increase in s lowers consumption. However, in the medium- and long-run the initial effect is mitigated through the increase in k. In the new steady state consumption might even be higher. Algebraically, the impact of a change in s can be computed as follows: In the steady state we have: c = f (k ) sf (k ) = f (k ) (n + g + δ)k, (15) with k = k (s, n, g, δ). Günter W. Beck Advanced Macroeconomics November 23, / 34

26 Dynamics of the model The impact of s on consumption 2 To see what impact a change in s has on c this expression has to be differentiated with respect to s. The result is: c s = [ f (k (s, n, g, δ)) (n + g + δ) ] k (s, n, g, δ). (16) s The second term of this expression (derivative of k with respect to s) is always positive. (Why?) Thus, a change in s increases steady-state consumption (per unit of effective labor) if the expression in the squared brackets is larger than zero, given the old steady-state value of k. Maximum steady-state consumption is reached when f (k (s, n, g, δ)) = (n + g + δ). In this case, k has reached its golden-rule level. Günter W. Beck Advanced Macroeconomics November 23, / 34

Macroeconomics Lecture 1: The Solow Growth Model Richard G. Pierse 1 Introduction One of the most important long-run issues in macroeconomics is understanding growth. Why do economies grow and what determines

CHAPTER 8 : Capital Accumulation and Population Growth Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: the closed economy Solow model how

Chapter 1 Neoclassical growth theory 1.1 The Solow growth model The general questions of growth: What are the determinants of long-run economic growth? How can we explain the vast differences in both output

Long Run Growth Solow s Neoclassical Growth Model 1 Simple Growth Facts Growth in real GDP per capita is non trivial, but only really since Industrial Revolution Dispersion in real GDP per capita across

Notes on the Theories of Growth Economic Growth & Development These recitation notes cover basic concepts in economic growth theory relevant to the cases seen in class (Singapore, Indonesia, Japan, and

1 Endogenous Growth We present two models that are very popular in the, so-called, new growth theory literature. They represent economies where, notwithstanding the absence of exogenous technical progress,

Homework #1 1. In 1900 GDP per capita in Japan (measured in 2000 dollars) was $1,433. In 2000 it was $26,375. (a) Calculate the growth rate of income per capita in Japan over this century. (b) Now suppose

Chapter 11 Economic Growth This chapter examines the determinants of economic growth. A startling fact about economic growth is the large variation in the growth experience of different countries in recent

Economics 504 Chris Georges Handout on Growth Rates Discrete Time Analysis: All macroeconomic data are recorded for discrete periods of time (e.g., quarters, years). Consequently, it is often useful to

Mankiw, Chapter 8. Economic Growth II: Technology, Empirics and Policy Problem 1. Steady state values for two countries with different savings rates and population growth rates. To make the problem more

The Golden Rule Choosing a National Savings Rate What can we say about economic policy and long-run growth? To keep matters simple, let us assume that the government can by proper fiscal and monetary policies

VI. Real Business Cycles Models Introduction Business cycle research studies the causes and consequences of the recurrent expansions and contractions in aggregate economic activity that occur in most industrialized

ECON 3010 Intermediate Macroeconomics Chapter 3 National Income: Where It Comes From and Where It Goes Outline of model A closed economy, market-clearing model Supply side factors of production determination

Economics 304 Fall 014 Country-Analysis Project Part 4: Economic Growth Analysis Introduction In this part of the project, you will analyze the economic growth performance of your country over the available

Economic Growth Spring 2013 1 The Solow growth model Basic building blocks of the model A production function Y t = F (K t, L t, A t ) This is a hugely important concept Once we assume this, then we are

Economics 304 Final Exam Fall 2000 PART I: TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. (1.5 pts. each) A decline in the stock market, which makes consumers poorer,

CHAPTER 0 Note on growth and growth accounting 1. Growth and the growth rate In this section aspects of the mathematical concept of the rate of growth used in growth models and in the empirical analysis

Chapter 3 A Classical Economic Model what determines the economy s total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand

Lecture 6 Investment Decisions The Digital Economist Investment is the act of acquiring income-producing assets, known as physical capital, either as additions to existing assets or to replace assets that

David N. Weil October 10, 2006 Lecture Notes in Macroeconomics Growth, part 1 Miscellaneous Preliminaries What is a production function? A production function is a mathematical function that tells us how

2 The Solow Growth Model The previous chapter introduced a number of basic facts and posed the main questions concerning the sources of economic growth over time and the causes of differences in economic

Agenda The Sources of Economic Growth Long-Run Economic Growth, Part 1 Growth Dynamics: 8-1 8-2 Long-Run Economic Growth Countries have grown at very different rates over long spans of time. The Sources

Macroeconomic Effects of Financial Shocks Online Appendix By Urban Jermann and Vincenzo Quadrini Data sources Financial data is from the Flow of Funds Accounts of the Federal Reserve Board. We report the

Chapter 5 Real business cycles 5.1 Real business cycles The most well known paper in the Real Business Cycles (RBC) literature is Kydland and Prescott (1982). That paper introduces both a specific theory

C H A P T E R 5 Capital Accumulation and Economic Growth Overview In this chapter we examine the relationship between increases in the capital stock and economic growth. We first discuss whether an economy

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey MURAT ÜNGÖR Central Bank of the Republic of Turkey http://www.muratungor.com/ April 2012 We live in the age of

True/false and explain Answer Key to the Sample Final Exam Principles of Macroeconomics Professor Adrian Peralta-Alva University of Miami State whether the following statements are true or false and explain

Chapter 1 IntroductionandGrowthFacts 1.1 Introduction In 2000, GDP per capita in the United States was $32500 (valued at 1995 $ prices). This high income level reflects a high standard of living. In contrast,

LECTURE 10: SINGLE INPUT COST FUNCTIONS ANSWERS AND SOLUTIONS True/False Questions False_ When a firm is using only one input, the cost function is simply the price of that input times how many units of

Section 4: Adding and Money Ec 123 April 2009 Outline This Section Fiscal Policy Money Next Keynesian Economics Recessions Problem Set 1 due Tuesday in class Fiscal Policy Fiscal Policy is the use of the

Agenda Productivity, Output, and Employment, Part 1 3-1 3-2 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.

Lecture 1: The intertemporal approach to the current account Open economy macroeconomics, Fall 2006 Ida Wolden Bache August 22, 2006 Intertemporal trade and the current account What determines when countries

Intermediate Macroeconomics: The Real Business Cycle Model Eric Sims University of Notre Dame Fall 2012 1 Introduction Having developed an operational model of the economy, we want to ask ourselves the

The Conquest of U.S. Inflation: Learning and Robustness to Model Uncertainty Timothy Cogley and Thomas Sargent University of California, Davis and New York University and Hoover Institution Conquest of

Macroeconomics Questions 2013 Economics Honors Exam Question 1. (40 minutes) The savings rates of Chinese households are among the highest in the world. This question asks you to analyze the consequences

Is Piketty s Second Law of Capitalism Fundamental? Per Krusell Institute for International Economic Studies, CEPR, and NBER Anthony A. Smith, Jr. 1 Yale University and NBER April 27, 2015 (first version:

Phd Macro, 2007 (Karl Whelan) 1 Real Business Cycle Models The Real Business Cycle (RBC) model introduced in a famous 1982 paper by Finn Kydland and Edward Prescott is the original DSGE model. 1 The early

Teaching modern general equilibrium macroeconomics to undergraduates: using the same theory required for advanced research Max Gillman Cardi Business School pments in Economics Education (DEE) Conference

7 The labour market, I: real wages, productivity and unemployment 7.1 INTRODUCTION Since the 1970s one of the major issues in macroeconomics has been the extent to which low output and high unemployment

Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

1. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in

Chapter 17 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change

The EU Enlargement, and Immigration from Eastern Europe Olivier Blanchard October 2001 Let me start by sketching a toy model of immigration. Think of all the capital as being in the West (Western Europe).